Literature Review on SME Access to Credit in South Africa_Final Report_NCR_Dec 2011.pdf

7/25/2019 Literature Review on SME Access to Credit in South Africa_Final Report_NCR_Dec 2011.pdf

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LITERATURE REVIEW ON SMALL AND

MEDIUM ENTERPRISES ACCESS TO CREDITAND SUPPORT IN SOUTH AFRICA

December, 2011


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Literature Review on Small and Medium Enterprises Access to

Credit and Support in South Africa

Prepared for

National Credit Regulator (NCR)

Compiled by

Underhill Corporate Solutions (UCS)

Project Manager and Lead Researcher: Edmore Mahembe

Pretoria, South Africa

December, 2011

Contact Details:

Edmore Mahembe357 Flowers StreetCapital Park, 0084

Cell: +27 (0)83 757 3733Phone: +27 (0)12 751 3237

Fax: 086 540 7052/086 639 8976

E-mail: [email protected] [email protected]

Website: www.underhillsolutions.co.za


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ACKNOWLEDGEMENTS

The research team wishes to acknowledge the co-operation of the following organisations and

individuals that helped attain the goals of the evaluation.

1. National Credit Regulator (NCR) for the opportunity afforded to Underhill Corporate

Solutions (the research consultants) to conduct this study Literature Review on Small and

Medium Enterprises Access to Credit And Support in South Africa.

2. Client project managers: Thandile Gubevu and Darrell Beghin, for facilitating the overall

project exercise and the useful comments on the draft report that helped shape the format of

the final report.

3. NCR board members; for useful and valuable comments on the draft report that helped in

the development of detailed and well informed recommendations.

4. Finally, special appreciation to key research team members, namely;

i. Edmore Mahembe,

ii. Chiara Chiumya, and

iii. Peter Mbewe.


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Table of ContentsEXECUTIVE SUMMARY 7

1 INTRODUCTION 13

1.1 Introduction 13

1.2 Importance of SMEs in the economy 13

2 STUDY METHODOLOGY 17

2.1 Background 17

2.1.1 Project rationale 17

2.1.2 Problem statement 17

2.1.3 Study objectives 17

2.1.4 Scope of the study 17

2.2 Study Methodology: Literature and Document Review 18

2.2.1 Introduction 18

2.2.2 Literature search 19

2.2.3 Thematic content analysis 20

2.3 Methodological Limitations 20

3 DEFINITIONS OF SMES 22

3.1 International Overview 22

3.2 Defining an SME in South Africa 24

3.2.1 The official definition 24

3.2.2 A common understanding of SMEs? 26

3.3 SA Policy and Institutional Framework 27

3.3.1 Background 27

3.3.2 The institutional framework 27

3.3.3 Conclusion 30

4 DEMAND FOR CREDIT AND SUPPORT BY SMES 31

4.1 Introduction 31

4.2 Identifying the Needs of the SME Sector 31

4.3 Demand of Credit and Support by SMEs 32

4.3.1 Demand for finance and SME market size 324.3.2 Other needs of the SME sector 36

5 SUPPLY OF CREDIT AND SUPPORT TO SMES 38

5.1 The Public Sector 38

5.1.1 Funding and support programmes available to the SME Sector 38

5.1.2 How effective is public sector support of small business? 42

5.1.3 Why has Government support of small businesses failed? 43

5.2 The Commercial Banking Sector 44

5.2.1 Role of the Banking Sector 44

5.2.2 The South African Banking Sector 44


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5.3 Donors, NGOs and the Private Sector 47

5.3.1 Donor funding 47

5.3.2 Microfinance Sector 49

5.3.3 Other Sources of SME Funding 50

6 POSSIBLE CREDIT AND SUPPORT GAP 51

6.1 Introduction 51

6.2 Access to finance: Some definitions 51

6.2.1 Equity versus debt financing 51

6.2.2 What is financing gap? 52

6.2.3 Indicators of access 52

6.2.4 Measures of quality access 52

6.3 Do we have an SME access to credit gap in South Africa? 52

6.3.1 Internal factors (SME-specific characteristics) 54

6.3.2 Systemic factors (external factors) 60

6.3.3 Financial Exclusion 62

6.3.4 Poor uptake of the initiatives 64

7 CONCLUSIONS AND POLICY RECOMMENDATIONS 65

7.1 Conclusion 65

7.1.1 Characteristics of the SME Sector 65

7.1.2 Defining SMEs 65

7.1.3 Data Availability 66

7.1.4 Access to finance gap 67

7.2 Recommendations 68

7.2.1 Increasing the levels of formality of SMEs. 68

7.2.2 Improving information available on small businesses 69

7.2.3 Improving on SME-specific characteristics 69

7.2.4 Establishment of a Government Department to deal specifically with SMEs,entrepreneurship and support for this sector. 71

7.2.5 Monitoring and evaluations of current Government programmes 71

7.2.6 Marketing and product awareness 72

7.2.7 Promotion of developmental credit products/services 73

BIBLIOGRAPHY 74

ANNEXURE A: TERMS OF REFERENCE 76

ANNEXURE B: PROJECT BACKGROUND 78

ANNEXURE C: EVALUATION OF SELECTED SME SCHEMES 79

ANNEXURE D: PROVINCIAL FUNDING PROGRAMMES AND 84

SCHEMES 84

ANNEXURE E: DEFINITIONS OF SMES - INTERNATIONAL CONTEXT 87

ANNEXURE F: SMME CLASSIFICATIONS 91


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List of Figures

Figure 1: Methodological Approach..................................................................................................... 19

Figure 2: Composite measure of access to financial services............................................................... 46

List of Tables

Table 1: Contribution of SA SMEs to the economy............................................................................. 14

Table 2: SME participation and contribution to the economy (selected countries).............................. 14

Table 3: Application for Qualitative Indicators.................................................................................... 23

Table 4: Synopsis of SME Definitions by Region................................................................................ 23

Table 5: Broad Definitions of SMMEs in the National Small Business Act ........................................ 25

Table 6: NCA Definition (Juristic Persons).......................................................................................... 26

Table 7: Growth phases and funding requirements of SMEs............................................................... 33

Table 8: Number of Small Business in South Africa............................................................................ 34

Table 9: Average Loan Size by SME Category.................................................................................... 36

Table 100: SME support programmes................................................................................................. 39Table 11: Small-business awareness and use of Government support.................................................. 42

Table 12: Small business book of major banks..................................................................................... 45

Table 13: Barriers to loan services: business and SME loans.............................................................. 46

Table 14: Finance applications success rates for SMEs........................................................................ 55

Table 15: Start-up, new firm and established business entrepreneurial activity (%) for efficiency-driven economies.................................................................................................................................. 60

Table 16: Financing gap in terms of SME numbers............................................................................. 63

Table 17: Definition of SMEs in Selected Arab Countries................................................................... 89

List of Acronyms and AbbreviationsAMFISA Association for Pro-poor Micro Finance Institutions for South Africa

APS Adult Population Survey

BBBEE Broad Based Black Economic Empowerment

BDS Business Development Services

BSM Business Sophistication Measure (FinScope)

CBOs Community Based Organisations

CDE Centre for Development of Enterprise

CIE Centre for Innovation and Entrepreneurship

CIPC Companies and Intellectual Property Commission

CIPRO Companies and Intellectual Property Registration OfficeCPPP Community Public Private Partnership

DED Department of Economic Development

DGRV German Co-operative and Raiffeisen Confederation

DST Department of Science and Technology

FNB First National Bank

FSCs Financial Services Cooperatives

GDP Gross Domestic Product

GEM Global Entrepreneurship Monitor

HDIs Historically disadvantaged individuals

IDC Industrial Development Corporation


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IFC International Finance Corporation

Khula Khula Enterprise Development Fund

LBSC Local business service centres (Ntsikas)

LDCs Less developed countries

LFS Labour Force Survey (Statistics SA)

MACs Manufacturing Advisory Centres (MACs

MCP Microcredit Program

MFIs Microfinance institutions

Namac National Manufacturing Advisory Centre

NCA National Credit Act

NCR National Credit Regulator

NGOs Non Governmental OrganisationsNSB Act National Small Business Act of 1996 as amended by the National Small Business

Amendment Act of 2003 and 2004

NSBAC National Small Business Advisory Council

NYDA National Youth Development Agency

OCIPE Office of Companies and Intellectual Property Enforcement

OECD Organisation for Economic Co-operation and Development

PFMA Public Finance Management Act

SA South Africa

Samaf South African Micro Apex Fund

SEDA Small Enterprise Development Agency

SEF Small Enterprise Foundation

SESE Survey of Employers and the Self-Employed (Stats SA)

SETAs Sector Education and Training Authorities

SMBs Small and Medium Businesses

SMMEs Small, Medium and Micro-Enterprises

TCP Thomisano Credit Programme

the dti/DTI Department of Trade and Industry

UCT University of Cape Town

UN United Nations

UNIDO United Nations Industrial Development Organisation

WB World Bank


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EXECUTIVE SUMMARY

1.

Introduction

There is consensus among policy makers, economists, and business experts that small and medium

enterprises (SMEs) are drivers of economic growth. A healthy SME sector contributes prominently to

the economy through creating more employment opportunities, generating higher production

volumes, increasing exports and introducing innovation and entrepreneurship skills. The dynamic

role of SMEs in developing countries insures them as engines through which the growth objectives of

developing countries can be achieved.

It is estimated that SMEs employ 22% of the adult population in developing countries1. United

Nations Industrial Development Organisation (UNIDO) estimates that SMEs represent over 90% of

private business and contribute to more than 50% of employment and of gross domestic product

(GDP) in most African countries (UNIDO, 1999). A recent study conducted by Abor and Quartey

(2010) estimates that 91% of formal business entities in South Africa are SMEs, and that these SMEs

contribute between 52 to 57% to GDP and provide about 61% to employment.

The democratically elected Government of South Africa (SA) realised, as early as 1995, the

importance of SMEs to the economy. The White Paper on National Strategy for the Development and

Promotion of Small Business in South Africa (1995) highlighted the fact that Small, medium and

micro enterprises represent an important vehicle to address the challenges of job creation, economic

growth and equity in our country.

2. Background

Despite their significant importance and SME contribution to economic growth, SMEs across

the whole world, and in SA in particular, are still faced with numerous challenges that inhibit

entrepreneurial growth. Apart from SME funding and access to finance (which is the focus ofthis study), the Global Entrepreneurship Monitor (GEM) Reports (2001-2010) noted that SA

SMEs also suffer from poor management skills which is a result of lack of adequate training

and education. This results in high rates of business failure (SA has one of the lowest SMEs

survival rates in the world).

1A D, 1994; D &, 1992; D &F, 1992; F, 1992; F&

M, 1991; G & .


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This study investigates the extent of access to credit and support by SMEs in SA. The study

was commissioned by the National Credit Regulator (NCR) and it seeks to understand what

has been researched and written on SME access to credit and support in relation to juristic

persons as defined by the National Credit Act (NCA). The study is intended to assist the NCR

make policy proposal to the Minister for the Department of Trade and Industry (the dti) on

matters affecting the consumer credit industry in order to improve access to credit for persons

contemplated in the Act.

3. Study Methodology

This report is entitled Literature Review on Small Medium and Enterprises Access to Credit and

Support in South Africa.As the title suggests, the methodology adopted for this study is the literature

review. A research literature review is a systematic, explicit and reproducible method for identifying,

evaluating and synthesizing the existing body of completed and recorded work produced by

researchers, scholars and practitioners. This report provides an organised critical account of

information, ideas and knowledge that has been published (or is available in the public domain) on

SME access to credit.

The main limitation of the literature review, as a study methodology, is that it relies on information

which has already been researched (secondary information), and if there is none, then specific

questions on the new study might not be adequately answered. Secondly, owing to different objectives

and methodologies (and study designs) of previous studies, the data might not be in the right format or

specific enough to answer the current study. Because of these limitations, a literature review is always

conducted in preparation for primary and more detailed research.

Despite the above limitations, this study employed the literature review process in a systematic way

following the input-processing-output approach. This involves sequential steps to collect, know,

comprehend, apply, analyse, synthesize and evaluate quality literature in order to provide a firm

foundation to the topic under study.

4. Access to Credit Gap

The main objective of the study is to assess the access to credit and support by SMEs in SA. The main

research question was Is there an SME financing gap in South Africa?The term financing gap

refers to a situation where a sizeable proportion of economically significant SMEs cannot obtain

financing from banks, capital markets or other suppliers of finance. Furthermore, it is often alleged

that (i) many entrepreneurs or SMEs that do not currently have access to funds would have the


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capability to use those funds productively if the funds were available; (ii) but due to structural

characteristics, the formal financial system does not provide finance to such entities.

To adequately answer the question Is there an SME financing gap in SA?, the study divided the

SME sector into two markets; (i) demand for and (ii) supply of credit. The analysis reveals that, just

as for the rest of the SA economy, the SME sector is divided into two; (i) the first economy (where

formal SMEs are operating) and (ii) the second economy (informal SMEs).

Using the definition of financing gap given above, only formal SMEs (by virtue of being formally

registered and having a bank account) have access to banks, capital markets or other suppliers of

finance. Informal SMEs are excluded completely from the formal financial market.

Financing gap in terms of SME numbers

(2010) (2007)

ME 5 979 510 2 432 000 A

ME (F): 17.3% 1 034 455 420 736 B

A : 84.4% 873 080 355 101 C

A (F): 33.2% 343 439 139 684 D

: 27.3% 93 759 38 134 E

F G (CE) 779 321 316 967 F

I: 41.8% 2 334 439 1 016 576 GL: I (15.3%) 357 169 155 536 H

F E (GH) 1 977 270 861 040 I

( ): + 2 756 591 1 178 007

ME

Source: Authors calculations based on the figures above and analysis of the literature

Based on the above table, SA has between 2,4 to 6 million SMEs. Around 20% of these SMEs are

registered with Companies and Intellectual Property Commission (CIPC)2and have a bank account.

Of the formal SMEs, less than 100,000 (27.3%) successfully apply and receive funds from the formalfinancial sector. Almost half of the SMEs are not registered hence are operating informally. Owing to

their informality, most (84.7%) of them are financially excluded. That is, they do not have access to

the formal financial markets. Thus, the total financing gap (both formal and informal SMEs) is

estimated at around 45-48% of all SMEs in South Africa.

2 C 1

M 2011 C A (A 71

2008). C , C

I E (CIE) C I

(CI).


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The broad picture that emerges from the various surveys of SME financing strongly suggest that

business owners in South Africa view access to financing as a significant problem for business

activity (Turner et al, 2008: 15), i.e. that there might be a financing gap despite the various public

and private sector initiatives to facilitate access to financing. Respondents to the FinScope Small

Business Survey (2010), however, when asked to identify the single most significant obstacle to

growth, access to finance ranked third3with 8.7% of small business owners citing the lack of access to

finance as a reason4. This finding may be attributable to the fact that South Africa has a relatively well

developed financial sector with a ratio of domestic credit to GDP of 78%.

This studys analysis of supply side of the SME credit market reveals that South Africa has a variety

of funding programmes and financing schemes by both the public and private sector funding agencies.

It was also noted that despite the availability of an array of funding programmes, awareness of these

programmes and the uptake has been very low (DTI, 2008), especially for Government supported

schemes. For those SMEs who apply for finance, the rejection rate has been high, particularly for

bank sponsored schemes. There seems to be: (i) a general lack of awareness of the funding

programmes; (ii) a mismatch between the products offered on the supply side and that which is

required by the SME market; and (iii) a gap between the minimum requirements for a business loan

and status (especially on the issue of formality) of the majority of SMEs. This means that even

registered microenterprises are less likely to have access to credit. Furthermore, a large proportion of

the SMEs are completely excluded from the financial market.

Even those SMEs who are in the formal market, a further complication faced by entrepreneurs trying

to access finance is that banks are not set up to cope with small loans. For example, only 59% of small

and medium enterprises had any credit products as compared to 82% for large firms. Micro finance

institutions (MFIs), on the other hand, do have structures in place for smaller loans, but the loans are

at high interest rates that most small businesses cannot afford. Other factors inhibiting SMEs access

to credit include the lack of business managerial experience and skills, insufficient information on

available products, relatively low levels of financial literacy, poor business plans and other externalfactors.

3A M

C.4 16.2%

(12.5%). A 5

(F 2010). A C D E (CDE);

2007 2007

, , , , ,

(CDE,

2007: 57 DI, 2008: 49).


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5. Conclusion and Recommendations

The literature review revealed that there are a number of sources of credit for SMEs. However, it is

not possible to determine with any degree of accuracy whether the financing available is sufficient to

meet the needs of the SME sector due to the lack of information, especially with regard to the demand

side and the specific causes for the lack of access. Therefore, more research is needed in this area to

(1) identify the specific needs of the SME sector when it comes to financing and (2) whether the

financing available meets those needs in terms of both quantity and quality.

There is a possibility that there is sufficient credit being made available, but the terms and conditions

under which it can be accessed are not favourable for the SME sector it is intended to serve. In other

words, there is sufficient quantities of funding available, but the quality of funding (i.e. the

product design/services being offered) does not match the needs of the sector. In this case, the policy

response should not be designed to increasing the amount of credit available to the sector, but should

involve revisiting the product offering of the credit already available and ensuring that it meets the

needs of the SME sector it is intended to serve.

Another possibility that needs consideration is that in which credit is available and sufficient to meet

demand, but the lack of access is attributable either to the specific characteristics of the SMEs

applying for the loan or the lack of awareness that the financing is available. In these instances, the

policy response required would necessarily be different from that of increasing funding available, orindeed, changing product design/service offering.

If there is, in fact, a shortage of finance (quantity of loanable funds), the Government can increase the

supply of funds through funding of existing agencies like the National Youth Development Agency

(NYDA), Khula and other Government owned institutions.

With regard to the scenario where sufficient credit is available, but the terms and conditions of

accessing the financing is problematic for the SMEs due to poor product design/service offering, theninterventions will need to address this particular deficiency. With respect to private entities, it is

hoped that competition and the desire to increase returns from catering to this segment will improve

product design and services offered. For Government funded programmes, the evaluation and

monitoring of the various schemes and programmes on a regular basis should help the Government

keep abreast of the applicability of the various programmes and schemes.

Thirdly, with respect to situations where credit is available, but access is constrained by SME specific

factors, then interventions will have to be targeted to deal with these specific SME characteristics. To


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summarise, the characteristics being referred to relate to: (1) the lack of information available with

respect to the business, or where there is information available the information is of very poor quality;

(2) the lack of collateral; (3) the failure to access financial services, including credit, due to various

perceptions small business owners have of the requirements needed for access; (4) the poor level of

managerial competence and skills of the small business owner; (5) the age of the enterprise; and (6)

the legal status of the enterprise.

The main recommendations arising from the study are interventions that focus on:

(i) Increasing the levels of formality of SMEs this can be achieved through the compulsory

registration of SMEs that have not yet registered, at minimal or no cost to the SME.

(ii) Training and capacity building building on current programs and establishing new ones if

warranted to improve the levels of managerial competence of the small business owner.

(iii)Establishing of a Government department to deal specifically with SMEs, entrepreneurship and

support to this sector.

(iv)The monitoring and evaluation by Government of its SME funding programmes on a regular

basis. This will help the Government keep abreast of the applicability of the various programmes

and schemes. The immediate objective of the evaluation of current programmes and schemes is

identifying the reasons why awareness and uptake has been low.


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1 INTRODUCTION

1.1 Introduction

There is consensus among policy makers, economists and business experts that small and medium

enterprises (SMEs) are drivers of economic growth. A healthy SME sector contributes prominently to

the economy through creating more employment opportunities, generating higher production

volumes, increasing exports and introducing innovation and entrepreneurship skills. According to

Bashir Ahmad Fida (2008), SMEs are the first step towards development in economies towards

industrialisation. The dynamic role of SMEs in developing countries positions SMEs as engines

through which the growth objectives of developing countries can be achieved a role that has long

been recognised.

One of the significant characteristics of a flourishing and growing economy is a vibrant and blooming

SME sector. SMEs play a pivotal role in the development of a nation. They contribute to socio-

economic development in various ways; namely, by creating employment for a rural and urban

growing labour force and providing desirable sustainability and innovation in the economy as a

whole. Fayad (2008) propounds that most of the current multi-million dollar enterprises have their

origin in SMEs. Nevertheless, SMEs in developed and less developed countries (LDCs), as in other

countries, are still facing a number of difficulties and obstacles that are impeding and complicating

their operations and growth.

1.2 Importance of SMEs in the economy

The value of the small business sector is recognised in economies world-wide, irrespective of the

economys developmental stage. The contribution towards growth, job creation and social progress is

valued highly and small business is regarded as an essential element in a successful formula for

achieving economic growth (Vosloo, 1994: i). It is estimated that SMEs employ 22% of the adult

population in developing countries (Daniels, 1994; Daniels & Ngwira, 1992; Daniels & Fisseha,

1992; Fisseha, 1992; Fisseha & McPherson, 1991; Gallagher & Robson). UNIDO (1999) estimates

that SMEs represent over 90% of private business and contribute to more than 50% of employment

and of GDP in most African countries.

An earlier study by the Competition Commission (2004) estimated that 99.3% of South African

businesses were SMEs and that these SMEs accounted for 53.9% of total employment and contributed34.8% to GDP.


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Table 1: Contribution of SA SMEs to the economy

F 19.6 31.3 19.8 20.5 6.8 1.3 0.7

E 2.2 3.5 6.5 13 15.7 13 46.1

GD 15 65.25.8 13.9 Source: Falkena et al. (2004)

The World Bank (2007), however, estimated that the SME contribution to employment generation

was 39% in South Africa. Chinas SME sector contributed 78% to its total employment.

Table 2: SME participation and contribution to the economy (selected countries)

Micro Small Medium SMEs

SMEs per

1,000

people

SME

employment

(% total)

Brazil 93.9 5.6 0.5 4 903 268 27.4 67.0

China n/a n/a n/a 8 000 000 6.3 78.0

Egypt 92.7 6.1 0.9 1 649 794 26.8 73.5

United Kingdom 95.4 3.9 0.7 4 415 260 73.8 39.6

Ghana 55.3 42.0 2.7 25 679 1.2 66.0

India 94.0 3.3 295 098 0.3 66.9

Mexico 2 891 300 27.9 71.9

Malawi 91.3 8.5 0.2 747 396 72.5 38.0

Russian Federation 6 891 300 48.8 50.5

United States 78.8 19.7 1.5 5 868 737 20.0 50.9

South Africa 92.0 7.0 1.0 900 683 22.0 39.0

Structure of the MSME Sector

(% of all MSMEs)SME Participation in the Economy

Country Name

Source: World Bank (2007)

A recent study conducted by Abor and Quartey (2010) estimates that 91% of the formal business

entities in South Africa are SMEs and that these SMEs contribute between 52 to 57% to GDP and

account for approximately 61% of employment.

The 2009 GEM report emphasises that there is a very tight correlation between the level of

entrepreneurship in a country and its rate of economic growth.

Bartel and Martin (1990: 775) state that a major reason why entrepreneurship has been receiving

increased attention from both scholars and the public press is the growing recognition of the

substantial economic and social contributions entrepreneurship brings. The economic contributions

include economic growth, maintaining a favourable balance of payments and balance of trade and


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employment creation. Socially, entrepreneurship results in poverty eradication and improved

standards of living. SMEs are, therefore, an essential panacea for improving the standards of living in

a society and the stability of a country.

The democratically elected Government of South Africa realised as early as 1995 the importance of

SMEs to the economy. Trevor Manuel, then Minister of Trade and Industry, clearly articulated these

issues when he said:

With millions of South Africans unemployed and underemployed, the Government has no

option but to give its full attention to the task of job creation, and generating sustainable and

equitable growth.

Small, medium and micro-enterprises represent an important vehicle to address the

challenges of job creation, economic growth and equity in our country.

We believe that the real engine of sustainable and equitable growth in this country is the

private sector. We are committed to doing all we can to help create an environment in which

businesses can get on with their job.

(Extracts from the White Paper on National Strategy for the

Development and Promotion of Small Business in South Africa)

Despite this acknowledged importance and SME contribution to economic growth, SMEs across the

globe, and in South Africa in particular, are still faced with numerous challenges that inhibit

entrepreneurial growth. Apart from SME funding and access to finance, the GEM Reports (2001-

2010) noted that South African SMEs also suffer from poor management skills, which is a result of a

lack of adequate training and education. This results in high rates of business failure - SA has one of

the lowest SMEs survival rates in the world.

This study investigates the extent of access to credit and support for SMEs in South Africa. The study

was commissioned by the NCR, and it seeks to understand what has been researched and written on

SME access to credit and support in relation to juristic persons as defined by the NCA. The study isintended to assist the NCR in making policy proposals to the Minister of the Department of Trade and

Industry (the dti) on matters affecting the consumer credit industry in order to improve access to

credit for persons contemplated in the Act.

The report is structured as follows. This section introduces the report and offers some background

information. The following section summaries the methodology adopted in this study. Section 3

presents an overview of the characteristics and definitions of SMEs from an international perspective

and then South Africa.


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The main findings of the study are discussed in Section 4 and 5. Section 4 estimates the market size of

SME and the demand for credit, whilst Section 5 presents the supply side of the market. Section 6

investigates the possibility of an SME access to financing gap and Section 7 concludes with some

policy recommendations.

It is also important for the reader to take note of the Annexures to this report. Almost all sections in

the main report have a detailed Annexure (A-F), which offers valuable background information. In

summary, the annexures are presented as follows; Annexure A provides the terms of reference (ToR)

to this assignment while Annexure B details the background to the project. Annexure C presents an

evaluation of selected SME schemes. This evaluation helps understand why most of the Government

schemes are not performing well and gives an insight on what to be done to increase SME uptake on

these programmes. Annexure D provides a summary of provincial funding programmes. Annexure E

and F revisit the issue of SME definitions, chronicle the subject from an international perspective, and

conclude with the local SME classifications.


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2 STUDY METHODOLOGY

2.1 Background

2.1.1

Project rationale

The NCR seeks to understand what has been researched and written on SME access to credit and

support in relation to juristic persons as defined by the NCA. The proposed project is a literature

review on Small Medium and Enterprises Access to Credit and Support in South Africa. It is

intended to assist the NCR in making policy proposals to the Minister on matters affecting the

consumer credit industry in order to improve access to credit for persons contemplated in the Act.

Therefore, the main objective of the proposed research is to assess and measure how small and

medium enterprises have access to credit and support in South Africa.

2.1.2 Problem statement

The NCR noted that there is a body of literature in the SME support and development space that

sought to bring to the fore the challenges, dynamics and funding issues faced by small enterprises.

Furthermore, there are Government policy programmes geared towards the support and funding of

small enterprises through a variety of funding agencies and institutions. However, it remains unknown

the extent to which these initiatives have succeeded in addressing the funding and support challenges

faced by SMEs or juristic persons as defined by the NCA.

2.1.3 Study objectives

The study seeks to understand what has been researched and written on SME access to credit and

support in relation to juristic persons as defined by the NCA. Therefore, the main objective of the

paper is to assess and measure the access to credit and support by SMEs in South Africa.

2.1.4 Scope of the study

The project (study) is entitled: Literature Review on Small Medium and Enterprises Access to

Credit and Support in South Africa. The scope of the study is SME access to credit in South Africa.

However, to gain a thorough understanding of the South African SME market, a benchmarking

exercise is carried out between South African SMEs and other countries.

According to the Terms of Reference (ToR), the scope of work on this assignment includes:


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i. Conducting detailed quantitative and in-depth research into the SME industry;

ii. Identifying suitable publications (e.g. journals, books, Government documents and popular

media);

iii. Conducting desktop research of other related research already conducted by other institutions;

and

iv. Assessing the SMEs access to credit support gap in South Africa.

2.2 Study Methodology: Literature and Document Review

2.2.1 Introduction

The methodology adopted for this study is the literature review. A research literature review, as a

process, is a systematic, explicit, and reproducible method for identifying, evaluating and synthesisingthe existing body of completed and recorded work produced by researchers, scholars and practitioners

(Fink, 2010). As a noun, literature review is an organised critical account of information that has been

published on a specific topic, (for example, SME access to credit) and provides an organised synthesis

of the information, ideas and knowledge.

The methodological approach is illustrated below (Figure 1). It involves both quantitative and

qualitative analysis of secondary data.


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Figure 1: Methodological Approach

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Source: Authors illustration

2.2.2 Literature search

A comprehensive literature search of published academic, peer reviewed professional literature using

a variety of databases including journal articles, conference papers, books, dissertations and technical

papers, both published and unpublished, was conducted. The main sources included libraries - both

public and university (University of Pretoria, UNISA) libraries and the Internet. Literature reviewedincluded:

i. Published journal articles, working papers and other theoretical publications on SME access

to credit;

ii. Papers/articles found on the websites for suppliers of credit, development financial

institutions, banks and other funders; and

iii. Papers/articles found on the websites for credit regulators and SME advocacy organisations.


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The collected data or information was categorised in groups, for example, the definition of SME was

viewed within a global, regional and South African context. Various definitions were explored and

analysed for their inclination and specificity to developing countries. Most of the literature search was

based on what others have come up with concerning SMEs access to credit in general and focusing

on the South African context. This approach helped the researchers to bring to the fore a developed

countries concept of SMEs and less developed countries context. In conducting the literature search

the main focus was to identify the critical drivers of SME failure in accessing credit, what constitutes

credit support and what the challenges are for both SMEs and fund managers. While the literature

research was being conducted, every effort was made to ensure that the sources were as relevant and

focused on the subject at hand as possible. The GEM reports and publications from SA development

financial institutions were drawn for comparison with similar state or private institutions. The

literature sources were also categorised accordingly either as quantitative (e.g. those focusing on

methodology or policy) or qualitative (e.g. case studies) for easy analysis and summarisation. The

literature search was broad enough to cover all relevant detail.

2.2.3 Thematic content analysis

The content analysis focused on literature relevant to make recommendations to policy makers,

development agencies, entrepreneurs and SME managers to ascertain the appropriate strategy to

improve the SME sector in SA. The methodology employed by different authors and researchers wasalso put under the spotlight. For example, case study research excels at bringing us an understanding

of a complex issue or object and can extend experience or add strength to what is already known

through previous research. Case studies focus on a detailed contextual analysis of a limited number of

events or conditions and their relationships. Qualitative reports, based on case study methodology,

were used in the literature review. On the other end of the spectrum, survey reports (mainly

quantitative) such as the GEM reports, adult population surveys (APS) and FinScope were also used

to assess the level of entrepreneurship of and access to credit by SMEs. Just like the GEM reports, this

study also consulted international data sources such as the World Bank (WB), International FinanceCorporation (IFC), the International Monetary Fund (IMF) and the United Nations (UN) in reviewing

international best practice on SME funding and support.

2.3 Methodological Limitations

The main limitation of the literature review as a study methodology is that it relies on the information

which has already been researched (secondary information), and if there is none, then specific

questions on the new study might not be adequately answered. Secondly, owing to different objectives


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and methodologies (and study designs) of previous studies, the data might not be in the right format or

specific enough to answer the objectives of the current study. Because of these limitations, a literature

review is always conducted in preparation for primary research.

In spite of the growing number of papers and articles that have been written about small, medium and

micro-enterprises (SMMEs) in South Africa, very little is really known about them. The Statistics

South Africa Labour Force Survey estimated that there were a total of 2,4 million small business in

2007. According to a 2009 Sunday Times (20 September 2009)5 article, there were 2,4 million

registered companies in South Africa of which 2,2 million were SMEs. The latest FinScope Survey

(2010) found that there are currently approximately 6 million small businesses in South Africa.

However, it is almost impossible to obtain accurate statistics of small business in each category

(namely micro, small and medium), or in the various sectors of the economy. This information is

unavailable on both a provincial and country-wide level. The lack of accurate data makes the

assessment and quantification of access to credit gap a mammoth task. It also hampers research and

the ability of Government agencies and nongovernmental organisations (NGOs) to offer the correct

targeted assistance to businesses in the small, medium and micro arena.

The lack of data is particularly noticeable among unregistered businesses that employ either casual

labour or offer employment only to the owner. While in many developed countries these businesses

are considered marginal in their contribution to employment and GDP, in South Africa (as in many

developing countries) these informal and micro-enterprises are key to the livelihood and survival of

millions of people6.

Adding to the confusion and difficulties in SME measurement and general understanding are the

differences in definitions. As will be highlighted in the section below, there are several definitions

used in international literature and in most of the empirical studies (or surveys) carried out in SA. For

example, the most constant and widely quoted survey, the GEM Reports, measure entrepreneurship,

and not the number of SMEs, to make international comparisons on the rate of entrepreneurshipacross countries. On the other hand, most of the Government agencies use the dti definition 7, but a

recent FinScope Survey (2010) used a slightly different definition8.

5://..//1322826213035/GEM%20A%202009%20

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3 DEFINITIONS OF SMES

3.1 International Overview

While the importance of the SME sector and the informal sector is acknowledged internationally,

defining an SME is a challenging task, as every country has its own definition. There is no single,

uniformly accepted definition of a small firm (Storey, 1994). Firms differ in their levels of

capitalisation, sales and employment. Hence, definitions which employ measures of size (e.g. number

of employees, turnover, profitability and net worth) when applied to one sector might lead to all firms

being classified as small, while the same size definition when applied to a different sector might lead

to a different result.

This section provides a broad overview of small enterprise definitions used across the globe with the

objective of understanding what an SME really is9. This understanding will go a long way in

comparing and benchmarking results from different studies.

SME definitions can be broadly categorised into two, economic and statistical definitions. Under

the economic definition, a firm is regarded as small if it meets the following three criteria: (1) it has a

relatively small share of their market place; (2) it is managed by owners, or part owners, in a

personalised way and not through the medium of a formalised management structure; and (3) it is

independent in that it is not part of a larger enterprise.

The statistical definition, on the other hand, is used in three main areas: (1) quantifying the size of

the small firm sector and its contribution to GDP, employment and exports; (2) comparing the extent

to which the small firm sectors economic contribution has changed over time; and (3) in a cross-

country comparison of the small firms economic contribution. These definitions, however, have a

number of weaknesses. For example, the economic definition, which states that a small business is

managed by its owners or part owners in a personalised way and not through the medium of a formal

management structure, is incompatible with its statistical definition of a small manufacturing firm

which might have up to 200 employees.

According to UNIDO10, the definition of SMEs is a significant issue for policy development and

implementation and depends primarily on the purpose of the classification. For the purposes of policy

development, UNIDO generally advises countries to take into account the quantitative and qualitative

9 A E F ME D.10

://.../ABI/633547381649218750.


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indicators for SME definition. The following table summarises the main qualitative indicators that

may be used in order to differentiate between SMEs and large companies.

Table 3: Application for Qualitative Indicators

Source: UNIDO11

It is also important at this juncture to define entrepreneurship12. Put simply, entrepreneurship is the

creation of new enterprise, which includes SMEs13.

Table 4: Synopsis of SME Definitions by Region

EU USA ASIA(Mlysia) EGYPT GHANA RUSSIA INDIA CHINA RSA

I nd us tr ia l C om me rc ia l

WORDSSmall and Medium

Enterprise

Small and Medium

Business

Small and Medium

Enterprise

Micro,Small and

Medium Enterprises

Micro,Small and

Medium Enterprises

Small and Medium

Enterprise

Small and Medium

Enterprise

Small and Medium

Enterprise

Micro,Small and

Medium Enterprise

Small and Medium

Enterprise

Small, Medium and

Micro Enterprise

# of EMPLOYEES

Micro < 10 0 < 5 1 to 4 up to 5 Up to 19 Up to 09 0 0 0 < 20

Small < 50


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The abbreviation "SME" occurs commonly in the European Union (EU) and in international

organisations such as the World Bank (WB), the United Nations (UN) and the World Trade

Organisation (WTO). The term "small and medium businesses" or "SMBs" is predominantly used in

the USA. In South Africa the term is SMME for small, medium and micro-enterprises, and

elsewhere in Africa, MSME is used for micro, small and medium enterprises.

3.2 Defining an SME in South Africa

3.2.1 The official definition

Like other countries, the issue of what constitutes a small or medium enterprise is a major concern in

SA. Various authors have usually given different definitions to this category of business. A common

definition of SMEs includes registered businesses with less than 250 employees (IFC, 2009: 9). Inpractice, SMEs are defined in a number of different ways, generally with reference either to the

number of employees or to turnover bands (or a combination of both, as in the National Small

Business Act 1996, which also allows for variations according to industry sector). The definition of

SMEs by size is necessary, but it is not sufficient for an understanding of a sector where the realities

are not only complex, but also dynamic.

In SA, a small business is official defined in Section 1 of the National Small Business Act of 1996

as amended by the National Small Business Amendment Acts of 2003 and 2004 (NSB Act) as:

a separate and distinct business entity, including co-operative enterprises and

nongovernmental organisations, managed by one owner or more which, including its

branches or subsidiaries, if any, is predominantly carried on in any sector or sub

sector of the economy mentioned in Column I of the Schedule14

... .

The NSB Act further categories small businesses in SA into distinct groups, namely; survivalist,

micro, very small, small and medium, hence the use of the term SMME for small, medium and

micro-enterprises. However, the terms SMME and SME are used interchangeably in SA. The SME

definition uses the number of employees (the most common mode of definition) per enterprise size

category combined with the annual turnover categories, the gross assets excluding fixed property; as

summarised in Table 5 below.

14 A F.


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Table 5: Broad Definitions of SMMEs in the National Small Business Act

( . ) ,

M F 100 200, I

L 4 50 I

L 2 18 I

F 50 L 2 25

I

L 2 4.5

I

F 10 20

I

L 200 000 500 000

I

L 150 000 500

000 I

M F 5 L 150 000 L 100 000

Source: Falkena et al., (2001)

i. Survivalist enterprise:The income generated is less than the minimum income standard or the

poverty line. This category is considered pre-entrepreneurial, and includes hawkers, vendors

and subsistence farmers. In practice, survivalist enterprises are often categorised as part of the

micro-enterprise sector.

ii. Micro-enterprise:The turnover is less than the value added tax (VAT) registration limit (that

is, R150,000 per year). These enterprises usually lack formality in terms of registration. They

include, for example, spaza shops, minibus taxis and household industries. They employ no

more than 5 people.

iii. Very small enterprise:These are enterprises employing fewer than 10 paid employees, except

for the mining, electricity, manufacturing and construction sectors, in which the figure is 20

employees. These enterprises operate in the formal market and have access to technology.

iv. Small enterprise: The upper limit is 50 employees. Small enterprises are generally more

established than very small enterprises and exhibit more complex business practices.

v. Medium enterprise: The maximum number of employees is 100 or 200 for the mining,

electricity, manufacturing and construction sectors. These enterprises are often characterised by

the decentralisation of power to an additional management layer.

The NCA, which established the NCR, adopts and uses the definition of small business in the NSB

Act, 1996 as amended and categorises any lending to small business as developmental credit. The

NCA uses the NSB Act definition for small business, and it further distinguishes between natural andjuristic persons.


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Table 6: NCA Definition (Juristic Persons)

Natural persons Juristic persons

Personal customers

Sole proprietors Trusts with two or less natural person trustees

Partnerships

Close corporations Companies

Trusts15with three or more trustees

Source: NCA (2006)

Only certain provisions of the NCA apply to juristic persons. Provisions relating to marketing, over

indebtedness and reckless credit do not apply to juristic persons. The NCA in its entirety does not

apply to juristic persons with an asset value or annual turnover of more than R1 million, nor does it

apply to juristic persons with an asset value or annual turnover of less than R1 million who enter into

a mortgage agreement or an agreement with a loan value of more than R250,000. Thus, the NCA only

covers small business which are sole proprietors, partnerships, close corporations, companies and

trusts with an annual turnover of R1 million or less and enters into a loan agreement of not more than

R250,000.

3.2.2 A common understanding of SMEs?

Compared to developed-country standards, SA thresholds are low. Many businesses which Americans

or Europeans regard as SMEs would be regarded as large enterprises in South Africa. Moreover, the

fact that the NSB Act distinguishes between enterprises in the different economic sectors and further

uses different thresholds for the different sectors is an acknowledgement that what is considered

small in the different economic sectors will vary depending on the nature of the activity undertaken.

Despite the categorisations having been stipulated in the Act, these categories are not used

consistently by state agencies or by private sector data-bases and research studies, making

comparisons difficult and unreliable. Moreover, the qualification in the dtis Annual Review of Small

Business in South Africa 2005 2007 (2008: 4) that the report will embrace as comprehensive a

definition of small businesses as possible, provided that the economic activity remains below the

thresholds for a large enterprise is indicative of the fact that there is no common understanding

and/or definition.

The dti report goes on to state that the terms small business and SMME are used as synonyms,

whereas the term enterprise refers specifically to entities (especially close corporations, cooperatives

15 .


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and companies) registered with CIPRO (DTI, 2008: 4) emphasising the fact that there are different

concepts of businesses. For statistical purposes, it would make a great deal of sense for the various

data-gathering bodies in the public and private sectors to arrive at, and use, agreed categories covering

the SME sector (SBP, 2000b).

3.3 SA Policy and Institutional Framework

3.3.1 Background

For the past fifteen years, the South African Government has invested in a plethora of initiatives

aimed at supporting and growing the SME sector. South Africas small business policy was

principally informed by the 1995 White Paper on national strategy on the development and

promotion of small business in South Africa (Timms, 2011: 20). The 1995 White Paper outlined,among other things, the need for the Government to create an enabling legal framework, facilitate

access to information and advice, boost procurement from small firms and to improve access to

finance and affordable physical infrastructure.

On the policy front, the NSB Act was passed in 1996, and stipulations pertaining to the sector were

built into the Broad Based Black Economic Empowerment (BBBEE) Codes of Good Practice (SBP,

2009a). The objectives of the 1995 White Paper now finds practical expression in the Integrated Small

Business Development Strategy for 2005 to 2014. The strategy is based on three pillars:

Increasing the supply of financial and non-financial support;

Creating demand for SMME products/services; and

Reducing regulatory constraints.

3.3.2 The institutional framework

The Governments main agencies and funds are distributed across mainly five different departments:

(1) the Department of Trade and Industry (the dti); (2) the Department of Economic Development

(DED); (3) the Department of Science and Technology (DST); (4) the Presidency; and (5) the

Department of Agriculture16.

16 A D .


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3.3.2.1.Department of Trade and Industry (the dti) - www.thedti.gov.za

Small business falls under the Minister of Trade and Industry and specifically under two of the

Departments units; the Enterprise Organisation and the Empowerment and Enterprise Development

Division. The department has various entities under it, namely:

i) Small Enterprise Development Agency (Seda) - www.seda.org.za

An agency of the dti mandated to support small enterprises, Seda, was formed out of a merger

between Ntsika Enterprise Promotion Agency, National Manufacturing Advisory Centre (Namac) and

the Community Public Private Partnership Programme (CPPP). The Godisa Trust and the Technology

Programmes were integrated into Seda in 2006, becoming Seda Technology Programme (STP).

ii) National Empowerment Fund (NEF) www.nefcorp.co.za

Set up in 1998 and operational in 2004, the NEF aims to fund black-owned and empower (both big

and small) businesses. Between 2003 and March 31 2010, the fund made 208 disbursements of over

R1.5 billion. Of these, 156 worth R457 million went to small black-owned businesses or franchisees

(through the Imbewu Fund).

iii) National Small Business Advisory Council (NSBAC)

The National Small Business Advisory Council (NSBAC)17, launched in 2006, falls under the dti and

reports to the minister of Trade and Industry. The council has eight members and serves to advise theMinister on ways to boost support to small businesses. The first council collapsed after two years in

1998 amid allegations of mismanagement.

3.3.2.2.Department of Economic Development

The Department of Economic Development (DED) was set up in 2009 to co-ordinate the South

African Governments economic policy. The Department oversees various entities, including:

i) Khula Finance Limited - www.khula.org.za

The Governments small business finance organisation was set up in 1996 to help fund small

businesses. Khula is a wholesale finance institution which operates across the public and private

sectors through a network of channels to supply funding to small business. Khula operates through a

network of financial intermediaries across the country. Its channels include South Africa's leading

commercial banks, retail financial institutions and specialist funds and joint ventures in which Khula

itself is a participant. Its primary aim is to bridge the "funding gap" in the SME market not addressed

by commercial financial institutions. Khula lending comprises of four (4) components;

17://...//2007/07070414151003.


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3.3.2.3.Department of Science and Technology

i)

Technology Innovation Agency (TIA) - www.tia.org.za

A new umbrella body set up in 2009 and launched in 2010 for funding innovation includes the

Tshumisano Trust which housed the technology transfer stations, the Innovation Fund, the Council for

Scientific and Industrial Research (CSIR)s Advanced Manufacturing Technology Strategy.

3.3.2.4.The Presidency

i)

National Youth Development Agency (NYDA) - www.nyda.org.za

Born in 2009 out of a merger between the National Youth Commission and the Umsobomvu Youth

Fund, the NYDA aims to assist the youth with career skills and to help start their own businesses. The

NYDA funds training and gives out loans. The Agency disbursed 7,500 micro loans to value of R23

million and a further R4 million in loans in the 2009/10 financial year.

3.3.2.5.Department of Agriculture,

i)

Micro-Agricultural Financial Institute of South Africa (Mafisa)

The Micro-Agricultural Financial Institute of South Africa (Mafisa) was established to contribute to

the working poors ability to run existing agricultural businesses; to start new ones and be able to

develop these into fully commercial operations. Mafisa propels and facilitates the development of

financial services intended to uplift very small and micro level farmers, farm workers, farm tenants,

small holders, landless emerging farmers and processes, etc.

3.3.3 Conclusion

Through these departments/agencies, numerous programmes, for funding or otherwise, have been

implemented. This set up has however proved problematic for strategic coordination purposes as

programmes tend to be implemented in isolation of each other; and also risks the effectiveness of

funding programmes to small businesses, a problem that has been identified by a number of

commentators, including the dti (DTI, 2008; SBP 2009a; Timms, 2011).


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4 DEMAND FOR CREDIT AND SUPPORT BY SMES

4.1 Introduction

As stated above, the main objective of the study is to assess the access to credit and support for SMEs

in SA. In order to determine whether there are indeed any gaps in terms of financing and other support

to the SME sector, it is important firstly to have an understanding of the following issues:

What specifically is meant by the SME sector in the South African context? How is this

sector defined? This is important as these businesses in the SME sector are the parties to

which the financing and support under consideration are targeted, i.e. the clients.

What are the needs of the SME sector? What types of financial services/products and support

products do they need or want? This is important as the interventions, private or public, have

to match what is needed/demanded otherwise the intervention will not be successful in

meeting its objectives. The uptake by the SME sector will be very low.

What financing support is available? Does the financing support available meet the needs of

the SME sector? In other words, is there a financing gap? The same applies to other support

that is available to the SME sector. This is important because, as stated above, the

interventions, private or public, have to match what is needed/demanded in order to meet the

desired objectives.

Some of the above questions were answered under the section on definitions above. The other

questions will be discussed in this and the following sections.

4.2 Identifying the Needs of the SME Sector

Statistics on small business in SA remains insufficient with no official repository for data on the

number of small enterprises. SAs statistics are typically derived from a variety of sources. These

include the Statistics SA Labour Force Survey (LFS), Statistics SA Survey of Employers and the Self-

Employed (SESE), the Adult Population Survey (APS) of the GEM reports, Statistics SA Integrated

Business Register, CIPRO18New Enterprise Register, Statistics SA statistics on liquidations of close

corporations and companies and the CIPRO Register of Co-operatives (DTI, 2008: xxiii); and

consolidated periodically in the dtis Annual Review of Small Businesses in South Africa. Even then,

surveys tend to be conducted sporadically and it can be difficult to put together the pieces from

18 CIC


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different data sources.Consequently, it is not clear how many small businesses there are, how many

people they employ and what the sector contributes to GDP (SBP, 2009b).

In order to develop effective interventions for the small business sector, it is important to have an

understanding of the sector, the specific challenges faced by small business owners and the capacity

they have to deal with those challenges (FinScope, 2010: 1). A lack of clear and accurate statistics is a

major stumbling block to SAs bid to developing more effective policies and support schemes for

small enterprises (Timms, 2011: 18). Most important of all, small business development initiatives

must get down to the level where small businesses actually operate, and must be targeted specifically

in the different sectors and value chains, and in specific localities to address small businesses diverse

characteristics, needs, constraints and opportunities (SBP, 2009a: 8).

The problem of data has been identified in a number of forums and publications. Not only are the

information sources poor, but can also be very difficult to access, including the official statistics

(SBP, 2009: 3). Also to be encouraged is the consistent use of categories (preferably those defined by

the Act) by all state agencies and private sector data bases and research studies to facilitate

comparability (SBP, 2000b).

The FinScope Small Business Survey undertaken in 2010 goes a long way in addressing some of the

issues noted above. For the full benefits to be derived from this initiative19, however, the definition of

the SME sector (or small businesses as they are referred to in the survey) should be agreed in

consultation with relevant stakeholders and the survey conducted at regular intervals to provide time

series data and facilitate impact assessments of the various interventions over time.

4.3 Demand of Credit and Support by SMEs

According to the Global Bank Alliance (2011), a key obstacle to the growth of SMEs globally is the

challenge in accessing capital for their businesses. This sub-section presents an argument on why

SMEs access to finance is low from the SME (demand side) perspective.

4.3.1 Demand for finance and SME market size

Much has been documented about the lack of financing for SMEs, not just in South Africa

(Herrington et al., 2010), but in many other parts of the world as well (Turner et al., 2008; OECD,

2006; Kauffmann, 2005). Some of the objectives of the FinScope Survey of 2010 were specifically to

19A .


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determine the levels of access for the small business sector and identify and describe the drivers of,

and the barriers to the usage of financial services and products for the small business sector in South

Africa.

Table 7: Growth phases and funding requirements of SMEs

Source: Felkana et al., (2001)

As illustrated above, the nature of funding required by an SME depends on its development phase.

Businesses in the start-up phase generally rely on personal savings, friends and families, while those

businesses which are stable rely on bank loans for financing.

Difficulty in accessing finance has remained one of the top three constraints mentioned by the

national expert panel in several surveys and SME studies in South Africa. The GEM 2002 and 2003

reports showed that a significant number of entrepreneurs from disadvantaged communities did not

keep financial records and that cash constraints were widespread amongst entrepreneurs from

disadvantaged communities with registered businesses. Cash flow difficulties were significantly

reduced in firms that kept a cash book, kept a record of debtors, practised active debtor management

and controlled inventory. Implementing any of these practices was associated with a minimum of 33%

reduction in the probability of an exhausted overdraft and doing all four appeared to reduce this

probability by as much as 61%. Implementing these practices also significantly increased the

probability that a firm would succeed in an application for term loan finance. The GEM 2003 report

concluded that a policy priority in SA was implementing programmes, including mentorship and


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training programmes, that addressed the apparent financial management weaknesses in many small

enterprises (Orford et al., 2003)20.

Defining small business owners as individuals who are: (1) 16 years or older; (2) perceive themselves

as business owners and generating an income through small business activity; and (3) employing

fewer than 200 employees, the FinScope Small Business Survey of 2010 found that there were

approximately 5,579,767 small business owners in South Africa owning 5,979,510 small businesses.

On the other hand, Stats SA estimated that they were 2,4 million small business in 2007.

Table 8: Number of Small Business in South Africa

Source: Stats SA Labour Force Survey (2008).

The information provided by the FinScope Survey (currently the most up-to-date) included the

number of small businesses in operation in 2010, their geographical distribution, the types of activities

undertaken/services offered and their level of sophistication21, the age of the businesses and the

profile of the business owners with respect to their gender, level of education, financial literacy and

money management skills. The FinScope Small Business Survey provides useful data on which

interventions can be designed, implemented and assessed and thus provides a good starting point uponwhich the current policies and interventions can be assessed in terms of their

suitability/appropriateness of the locality/segment to which they are targeted.

20, J. (2005). G E D.

8 2005. I, , A.21

B M (BM). BM

(BM 1)

(BM 8). C BM , ,

, , , (.. , , ),

(.. , , , ), .


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For instance, the largest proportion of small business owners resided in Gauteng (23%). 34.2% were

service providers of which 10.4% rendered a professional service (e.g. medical or legal service) and

58.9% a skilled service (e.g. plumbing or hairdressing). The probability for Business Sophistication

Measure (BSM) 7 and 8 type small businesses was highest in this province (11.8% and 9.0%

respectively). Small businesses in Gauteng tended to be larger than small businesses in other

provinces and their contribution to job creation the most significant (3.691 million). Small business

owners in this province had the highest likelihood of having post-matric qualifications.

This profile is very different from that of Limpopo province, for example, where 9.8% of small

business owners reside. 78.2% offered retail services of which 66.7% sold something in the same

form that it was bought and 20.3% bought something to sell but added value before reselling. The

probability for BSM 1 and 2 type small businesses was highest in this province (29.2% and 31.4%

respectively). Small businesses in Limpopo tended to be smaller than those in other provinces and

their contribution to job creation the fourth lowest at 0.877 million. Small business owners in this

province had the highest likelihood of having achieved, at most, primary school levels of education.

Considered together with the results from the World Bank Enterprise Survey and other studies

referred to in this paper, there is likely to be greater demand for credit in the Gauteng Province as it

has the largest number of small business owners as compared to, for example, demand for financing

in Limpopo. Demand for credit is more likely to be for investment purposes in Gauteng and therefore

of a longer term nature due the nature of business activity (service providers wanting to upgrade

premises or buy equipment as compared to retailers in Limpopo who would demand credit for

working capital purposes, i.e. buying stock).

Small business owners in Gauteng are more likely to be able to access credit because the probability

of BSM 7 and 8 type businesses is highest and therefore more formalised. This is in contrast to small

businesses in Limpopo which has the highest probability for BSM 1 and 2 businesses and, therefore,

are more likely to be of the microenterprise type and informal for whom access to finance is likely tobe problematic. Lastly, with respect to financial literacy and education, the types of intervention

needed in the two provinces would differ taking into consideration the differences in the average

minimum level of education.


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Table 9: Average Loan Size by SME Category

Source: Felkana et al., (2001)

From this analysis, one would expect higher levels of financing to be made available in Gauteng as

compared to Limpopo, the financing available to be skewed towards financing for investment in line

with the needs of the small business owners and interventions with respect to access to credit to focus

more on SME specific characteristics such as improving the provision of information and less on

financial literacy and education compared to interventions for small business owners in Limpopo

which might have more of a focus on financial literacy and education due to the low levels of

education.

Further research is required to determine whether the current support programmes are appropriate.

Programmes then need to be evaluated to determine their effectiveness. Ongoing monitoring and

evaluation mechanisms need to be put in place. It should not be left until the programme is due to

come to a close before an evaluation is done (Timm, 2011). The FinScope Small Business Survey

2010 provides a useful starting point for evaluating whether the SME support programmes that have

been put in place so far are targeted and appropriate for the needs of the SME sector

4.3.2 Other needs of the SME sector

In a similar vein, the FinScope Small Business Survey revealed that space to operate was ranked

highest as an obstacle to business growth with 16.2% of respondents citing this as a factor. Yet there

is only one SME support programmed aimed at addressing this need. The Khula Property Portfolioinitiative aims to provide business premises to business start-ups or those expanding to medium sized


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businesses. The rental charged is highly subsidised in order to encourage small business operators to

move into formal operating space (DTI, 2010: 65).

Contrary to what might have been expected, when asked to identify the single most significant

obstacle to growth, access to finance ranked third22with 8.7% of small business owners citing the lack

of access to finance as a reason23. This finding is contrary to the broad picture that emerges from the

various surveys of SME lending [that] strongly suggests that business owners in South Africa view

access to financing as a significant problem for business activity (Turner et al., 2008: 15) despite the

various public and private sector initiatives to facilitate access to financing, i.e. that there is in fact a

financing gap. Turner et al. (2008) do acknowledge, however, that other concerns such as crime and

corruption may make credit appear to be less of a problem.

Turner et al. (2008: 15) go on to state that ... nonetheless, South Africa witnesses a robust level of

SME activity in the formal and informal sectors, facilitated by a vibrant system of trade credit. The

evidence suggests that trade financing may be serving as a substitute24. This fact may explain high

levels of South Africa SME activity in the informal sector, particularly when compared to other

middle income countries25.

22A M C .

23 16.2%

(12.5%). A 5

(F 2010). A C D E (CDE) 2007

, , , , ,

(CDE, 2007: 57

DI, 2008: 49).24

F 2 5 , 9%

.25

F 8.3% (465,632)

CI.

(54.1%) (14.1%).


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5 SUPPLY OF CREDIT AND SUPPORT TO SMES

5.1 The Public Sector

5.1.1

Funding and support programmes available to the SME Sector

Despite the lack of financing being cited as a constraint in other publications, there are a variety of

funding programmes and financing schemes through the use of guarantees that are available, in

addition to other support programmes. Awareness and the uptake of these schemes, however, have

been very low (DTI, 2008). A number of publications, most of which can be accessed on the dti

website, provide information on the various Government SME support programmes available. These

include the dtis annual reports, A Guide to the dti Incentive Schemes (2011), the dti Medium Term

Strategic Plan 2011-2014 and the dtis National Directory of Small Business Support Programs. In

addition to these publications, information is also available on the respective implementing

entities/programmes websites. The National Directory is probably the most comprehensive of the

publications as the Directory is an attempt by the dti to cover all SME support programmes, both

public and private, that are available.

Support programmes can be classified into three broad categories: access to finance, market access

and business support. South Africa has a wide range of support schemes that target small business

owners in the areas of research and development, business and marketing support, exports and support

for setting up manufacturing, tourism and co-operatives. The majority are in the form of incentive

schemes which pay out matching grants to business owners, with either half or a large percentage of

the project costs being funded by the applicants themselves. Information relating to the support

programmes can be found from a number of sources, the most comprehensive of which is probably

the dti website and compiled in the dtis National Directory of Small Business Support Programmes.

The key national support programmes identified by the dti in the National Directory are Khula

Enterprise Development Fund (Khula), the National Youth Development Agency (NYDA), the Small

Enterprise Development Agency (Seda) and the Tshumisano Trust (DTI, 2010: 5-7). The Directory

provides information on 90 programmes. The Programmes have been grouped into 18 categories as

shown in the Table 10 below. Table 11 provides a brief description of selected SME Government

schemes.


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Table 10: SME support programmes

Programme category Number

Key national support programmes 4

Business competitions and awards 5

Credit indemnities/guarantee 2

Exhibitions 3Export development 2

Finance national 9

Finance youth 1

Finance women 3

Finance provincial 2 8

Incentives and grants 5

Incubation 22

Industry specific programmes 5

Linkage & Partnerships 2

Mentorship 2

Networking 1

Other support programmes 3

Premises 1Technology advice and transfer 5

Industry specific support 2

Training and technical assistance 5

Venture capital 1

Women enterprise programs 3

Total 90

Source: The DTI National Directory 2010

In addition to the selected SME Government schemes, support to the sector includes financing

schemes through the use of guarantees, one of which is provided by Khula. The Khula Credit

Indemnity Scheme wasestablished to give access to finance to people who wish to start or expand

smallto medium sized businesses but do not havesufficient collateralsecurity to support facilities

provided by participating banks. The scheme covers facilities from R10,000 to R3 million.

Entrepreneurs seeking a Khula credit indemnitycan either approach a Khula Credit Indemnitypartner

financial institution (ABSA, First NationalBank, Nedbank and Standard Bank) or a KhulaRegional

Office for assistance with businessplan development and/or advice. The partnerfinancial institution

will then assess the businessplan and facilitate the application in terms of its lending criteria. Once

the application has beenapproved, the financial institution will approachKhula for indemnity coverand a mentor may be appointed to help with implementation of the business plan, setting up

operational systemsand general business management. Thefinancial institution manages the facility

and collects payments for the duration of the facility. The full payment of the facility remains the

responsibility of the applicant.27

26G (1), M (2), K (1), E C (2), F (1) L (1).27

A K A B.


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Table 11: Selected SME Government Schemes

The Enterprise

Organisation

Description

The Black BusinessSupplier DevelopmentProgramme (BBSDP)

A cost-sharing grant offered to black-owned small enterprises to assistthem in improving theircompetitiveness and sustainability.Grants of up to R1 million are givenout for enterprises with an annualturnover of up to R35 million.

BBSDP: Since its inception in 2002till March 31 2010, 9 657enterprises with total disbursementsof R187.5 million have benefited.

The Export Market andInvestment Assistance(Emia):

This scheme assists businesses toattend trade fairs or to conduct tradevisits by refunding a significantportion of their air fare,accommodation, transport of samplesand marketing material.

Emia: In 2008/09 a total of 1 276businesses benefited from R110.9million in funding through thescheme. This is down from the 1332 assisted in the 2008/2009 year,when R106.4 million was disbursedin funding. Emia supported 779projects in 2009/10.

The Co-operativeIncentive Scheme: Provides start-up funding from R10000 to R300 000 to co-operatives,with the Government covering 90%of the funding in the form of a grant.

Co-operative Incentive Scheme:From 2006 to September 7 2010,357 co-operatives had been assistedto the tune of R71.2m

The EnterpriseDevelopmentProgramme:

Matching grants are provided tosmall manufacturing firms andbusinesses in the tourism sector.

The Enterprise DevelopmentProgramme: 164 tourism projects(to the value of R417 million) and290 manufacturing projects (R1billion) had been approved up to theend of February 2010

Support for IndustrialInnovation (Spii)

Spii funds research and development(R&D) for new innovations inmanufacturing, through a grant of

50% to 75% of up to R3m and hasbeen in operation since 1993.

Spii had funded 1 025 projects to thetune of R933 million up until March31, 2010. In 2007 the programme

was chosen by the OECD andWorld Bank as the best incentivesprogramme within the SouthAfrican Government

Technology andHuman Resources forIndustry Programme(Thrip).

Thrip supports scientific research andaims to foster a collaborationbetween academic institutions andindustry through a cost-sharing grantoffered by the department. Theprogramme is managed by theNational Research Foundation(NRF).

Thrip: Between 2006/07 and2009/10, 866 SMMEs were fundedto the tune of R240.3m.

Workplace Challenge

Programme

Cluster-based

Documents

Literature Review on SME Access to Credit in South Africa_Final Report_NCR_Dec 2011.pdf